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    • psychic teabag
    • By psychic teabag 27th Nov 12, 6:53 PM
    • 2,829 Posts
    • 1,678 Thanks
    psychic teabag
    • #2
    • 27th Nov 12, 6:53 PM
    • #2
    • 27th Nov 12, 6:53 PM
    Doesn't really address the unfavourable tax treatment of bad debt. Higher-rate taxpayers in particular really should not be lending on higher-risk markets. (Except perhaps on ratesetter if the provision fund works.)

    The table at http://www.p2pmoney.co.uk/compare/lend.htm is quite useful for illustrating how bad debt and tax rates interact.

    Also, rates quoted on zopa tend to be before fees, whereas ratesetter tends to quote rates after fees. So it's not fair to give typical rates of 6% on zopa for 3 years, but 5.8% on ratesetter for 5 years.
  • Former MSE Dan
    • #3
    • 27th Nov 12, 7:00 PM
    • #3
    • 27th Nov 12, 7:00 PM
    Hi there,

    That table looks very useful - thanks, I will look into it.

    The rates quoted should be net of fees, but I will recheck with Zopa.

    Dan
  • pqrdef
    • #4
    • 27th Nov 12, 7:31 PM
    • #4
    • 27th Nov 12, 7:31 PM
    These things tend to be described as high-risk high-return ionvestments, but in practice they work more like low-risk low-return investments. The average Zopa lender has about 2000 in. If that's in 200 slices of 10, his chances of losing a packet are small. But an "acceptable level of bad debt" is inevitable, and has to be set against the interest rate. The question that's left is whether the overall net return will actually beat the bank.
    • jamesd
    • By jamesd 27th Nov 12, 8:26 PM
    • 23,495 Posts
    • 15,831 Thanks
    jamesd
    • #5
    • 27th Nov 12, 8:26 PM
    • #5
    • 27th Nov 12, 8:26 PM
    Some things there that might merit some changes:

    "massive 8% interest on your cash". Same as the 8% regular saver account on up to 300 a month from First Direct for a year but that comes with full FSCS and FOS protection for the capital value and no investment risk at all. There are also many funds that pay out 6-8%+ and can be tax free inside an ISA. It's important to compare P2P with other investments, not just with risk -free savings accounts. People who are putting capital at risk should be picking the best of all of the capital at risk investment options, not just those that like to compare themselves with savings accounts.

    "This allows fees to be relatively low" is not really true. Zopa takes something in the range of 40-60% of all interest and fees paid by a borrower at median and lower loan sizes. It's easy to focus on just the 1% lender fee but the borrower fee is a huge factor and it's where Zopa is most greatly competing with lenders. Others have similar sorts of charges, so this isn't just Zopa. You need to look at the whole picture of how the site takes its cuts. You can check the current Zopa borrower fees at P2P Money. To see the Zopa cut, put the interest rate into a loan calculator and see how much interest is going to be paid over the term, add the Zopa fee for the loan size and work out how those total borrower costs are split between site and lender. The impact on lenders is that they aren't getting to benefit from the smaller loan size income potential where there's more money to be made, instead the P2P site is pocketing that money.

    Ratesetter provision fund: it's perhaps with mentioning the possible tax benefits of this, for it means that bad debt may not come out of after tax income. Very important for higher rate tax payers.

    "re-save" and "savings". I'm not keen on that wording. These are investments and should be described as such.

    "You MUST know the risks" doesn't mention one important factor: you can't go to the FOS, it's out of their scope. So you lose the easiest independent way of getting problems resolved. Worth mentioning this as well as the FSCS issue.

    "with peer-to-peer lending you could lose cash you lend. However, past performance of the three big players has shown that hasn't happened yet" is an inaccurate statement. What Zopa at least tends to do is instead say something like haven't lost money and ignores tax in the calculation of total interest paid less total bad debt. If that's positive then they say hasn't lost money, even if there's a loss after tax is deducted from the interest (remember you can't deduct bad debt, so it has to be paid for out of after tax interest, not before tax). To be more accurate you might word it to something along the lines of "most investors have made more in interest before tax than their losses to bad debt". That would be entirely accurate and also consistent with the way the P2P companies tend to work it. Losing money is inevitable, it's just a case of whether you make enough after tax to cover the losses and still end up with more than you'd get elsewhere.

    "The unknown unknowns": it's a good place to mention that at least through 2008 Zopa was saying that bad debt could be deducted from interest before paying tax. 2008 is also a good Zopa year to illustrate the risk of bad debt projections: bad debt levels for loans that year were around twice the levels given at the time the loans were made, particularly so for say the C market. Use caution with Zopa figures for this: they now report past bad debt against current bad debt allowances, not the ones in effect at the time the loans were made. Those are higher and so understate the effect on lenders who made the affected loans. It's important to give actual examples of places getting it wrong so people know that these thing aren't just theoretical, they really have and do happen.

    "how to protect yourself": the typical advice for those using unregulated or not protected by FSCS investments is to put in no more than 5% of your total investable assets per product. None of the P2P lenders are FSA regulated or FSCS protected and this general guidance should be given for them all, as it should for any unregulated collective investment. People like me with a high risk tolerance might go over that but it's excellent general guidance. It's also often a good idea even with regulated investments and diversifying them is a critical part of investor self-protection. Putting as much as 20% of your investments in one place is likely to be a bad move, even with fully regulated investments.

    It's also worth considering mentioning that you just can't count on getting your money out. If a borrower is in an IVA you're going to be stuck with the money lent until they complete their IVA. That can easily be a ten year arrangement to recover 50% of the money lent and you're stuck with the lender and telling HMRC about your interest every year. Zopa's 1% fee and get your money out doesn't apply to any loan where there's even one late payment so that further cuts the amount you can get out. This tends to make these places unsuitable for things like investing a potential mortgage deposit. You're likely to make money but it'll probably be tied up in the impaired loans and unavailable to you. Depends in part on how long the timescale is, though.

    Tax. People have to tell HMRC that they have received untaxed interest each year and how much, so HMRC can take the tax. If the interest reaches 2,000 in a year a tax return is needed. The article should mention this requirement.
    Last edited by jamesd; 27-11-2012 at 8:31 PM.
    • easteregg
    • By easteregg 28th Nov 12, 1:00 PM
    • 109 Posts
    • 52 Thanks
    easteregg
    • #6
    • 28th Nov 12, 1:00 PM
    • #6
    • 28th Nov 12, 1:00 PM
    It is good to see a positive article on MoneySavingExpert for peer-to-peer lending, but we should also not forget borrowers, as they too can benefit ! I run the website P2P money mentioned above.

    There is some excellent feedback from JamesD and Psychic Teabag so I won't reiterate their points, except for repeating that you can't compare Zopa's headline figure with Funding Circle and RateSetter due to differencs in fees and bad debts.

    There are actually 12 different peer-to-peer companies operating in the UK, but Zopa, Funding Circle, RateSetter and ThinCats are the big 4. Together all of these companies together have arranged over 350million in loans to date, and I estimate at their current growth rate they will arrange a further 250million in 2013.
    The most powerful force in the universe is compound interest
    by Albert Einstein (1879-1955)
  • merched50
    • #7
    • 28th Nov 12, 1:50 PM
    • #7
    • 28th Nov 12, 1:50 PM
    Great to see MSE giving us extra info about peer to peer lending.
    Just to say I've had money invested with Zopa since 2007 and even with bad debts and fees have made an average of 7.4% p.a. pre tax.
    The bad debts have come from 10 borrowers (out of 160) and without them the rate would have been about 9%!
    That doesn't include Zopa's Tell-a-friend rewards which they sometimes have, from which I've got 50.
    It's a bit more complicated than putting money in a savings account, but great to know you're side-stepping the banks and getting way better rates.
  • p2bman
    • #8
    • 28th Nov 12, 2:46 PM
    • #8
    • 28th Nov 12, 2:46 PM
    Well done MSE - a balanced view of the market. There's plenty of new players cropping up here too, each serving a niche. Funding Knight and rebuildingsociety.com are two that spring to mind and you can actually earn better rates through these sites as they don't have as many lenders. At the moment rates are driven down for lenders on the better established sites because there are lots of them and the auction process cuts off lenders who want to lend at higher rates like 8-12%.
    • jamesd
    • By jamesd 28th Nov 12, 2:50 PM
    • 23,495 Posts
    • 15,831 Thanks
    jamesd
    • #9
    • 28th Nov 12, 2:50 PM
    • #9
    • 28th Nov 12, 2:50 PM
    merched50, back when you started there were regular saver accounts paying 10%. Now there's one paying 8%. If you're investing less than can be put into those accounts you're actually worse off through using P2P lending than you would have been with the safe regular saver accounts.

    Worthwhile having a link to the top regular saver and top savings accounts suggesting check whether you can get a better deal from them. You often will be able to when it comes to the regular savers.
    • Chorlie
    • By Chorlie 28th Nov 12, 3:34 PM
    • 1,011 Posts
    • 555 Thanks
    Chorlie
    I read the MSE article regarding Zopa, its something I had thought about in the past but never really looked into it much.

    So last night I signed up to Zopa to get a feel for the site / lending etc. but looking at there recommended rates, there costs and possible bad debtors got me thinking is it worth the effort to do it.

    It seems to me that to make it worth while I'd need to invest 1k min but more like 2k to get Zopa's recommended 1/200th per investment (to spread the risk) so 2k would give me 200 10 to invest at rates between 5.5%-7.5% (going by Zopa A* & A recommended rates).

    Now if I'm getting 6% on my Regular Saver (Nationwide) and could get 8% at First Direct or 5% at Cheshire B/s (so the 2k could be within one or more of these accounts within 2 to 8 months) therefore the Zopa returns don't look that great, that's before you factor in the Charges, Bad Debtors and doing Tax Returns etc

    There seems to be enough people lending, so what am I missing, since I only started looking into them last night I guess I'm missing something that is making this more appealing than I can first see....?
    • veryintrigued
    • By veryintrigued 28th Nov 12, 4:09 PM
    • 2,822 Posts
    • 2,398 Thanks
    veryintrigued
    I read the MSE article regarding Zopa, its something I had thought about in the past but never really looked into it much.

    So last night I signed up to Zopa to get a feel for the site / lending etc. but looking at there recommended rates, there costs and possible bad debtors got me thinking is it worth the effort to do it.

    It seems to me that to make it worth while I'd need to invest 1k min but more like 2k to get Zopa's recommended 1/200th per investment (to spread the risk) so 2k would give me 200 10 to invest at rates between 5.5%-7.5% (going by Zopa A* & A recommended rates).

    Now if I'm getting 6% on my Regular Saver (Nationwide) and could get 8% at First Direct or 5% at Cheshire B/s (so the 2k could be within one or more of these accounts within 2 to 8 months) therefore the Zopa returns don't look that great, that's before you factor in the Charges, Bad Debtors and doing Tax Returns etc

    There seems to be enough people lending, so what am I missing, since I only started looking into them last night I guess I'm missing something that is making this more appealing than I can first see....?
    Originally posted by Chorlie
    I'm like you doing some initial digging here.

    There could be lots of reasons why investors are using these on top of the three accounts you mention.

    Firstly (unlikely) they may pay the maximum into all three and still have extra cash (after paying 1050) into these each month. This is doubtful though as they would need a current account at each of the first two and live near a Cheshire.

    More likely is the scenario that someone is paying into the FD or Nationwide (and maybe the Cheshire) and has extra cash available that they havent got in a decent ISA?

    ^ is me
  • mr_jetlag
    apples to oranges
    Regular savings accounts do not pay the headline rate on the entire amount - the effective rate before tax is roughly half since you put in a little more each month up to the max. Peer to peer lending, when properly reinvested, needs a bit of rampup to ensure your entire funds are lent out, but they often pay out at the advertised rates less 1-5% bad debt. I had a good experience with Zopa, would certainly try them again when I have longer term funds to invest.
    • khris210
    • By khris210 28th Nov 12, 6:00 PM
    • 45 Posts
    • 29 Thanks
    khris210
    FundingCircle experience
    A few figures might be of interest. I started in Jan 2011 with 1000 increased it to 1500 and then to 2000 currently. Difficult to work out but an average balance of 1000 in the first year and 1800 in the second year wouldn't be far out. My gross earnings have been 170.68 minus 23.18 fees minus 50.39 bad debts equals net earning of 97.11 over two years. The bad debts have all come in this second year, so the return in the first year was indeed about 8% gross,7.3% net, but in this second year after fees and losses it has been about 1.3%. I'm sorry but this is not good enough and I'm in the process of pulling my money out. Very disappointing.
    Last edited by khris210; 28-11-2012 at 6:04 PM. Reason: Should have read it properly before I posted!
    • Chorlie
    • By Chorlie 28th Nov 12, 6:47 PM
    • 1,011 Posts
    • 555 Thanks
    Chorlie
    Regular savings accounts do not pay the headline rate on the entire amount - the effective rate before tax is roughly half since you put in a little more each month up to the max. Peer to peer lending, when properly reinvested, needs a bit of rampup to ensure your entire funds are lent out, but they often pay out at the advertised rates less 1-5% bad debt. I had a good experience with Zopa, would certainly try them again when I have longer term funds to invest.
    Originally posted by mr_jetlag

    I agree the rate you get on the amount placed in a Regular Savers Account is about half the headline rate, however if I had 2k and had a 8% First Direct, 6% Nationwide & 5% Cheshire / Derbyshire Bs, I could place all the 2k within these account within 2 months (then continue to add to them each month), so I would get almost the headline rate 11.5/12ths and could increase it by placing the second months funds into 1 of my Lloyds Vantage 4% account.

    I can't workout the overall average rate over the year if I did the above (due to FD is 300, NW is 250 & Cheshire is 500 a month, so not a simple average of the rate) but I'd guess it would be around 6% some clever maths person will tell me the correct amount.
    • jamesd
    • By jamesd 28th Nov 12, 7:53 PM
    • 23,495 Posts
    • 15,831 Thanks
    jamesd
    mr_jetlag, the effective interest rate for regular savers isn't half the rate, it's the full rate. You get that on all of the money in the account for as long as it's there. If you start out with a lump sum then you'd have some money in another account and would get some blend of the two rates. A potentially interesting combination for some is to take income from investments, including P2P investments, and use that to pay into regular saver accounts, then on maturity move the money from the RS into the investments and repeat.

    khris210, seeing bad debt increase over time is expected and you can expect the amount of bad debt to continue to increase, on average over all your borrowers. But your personal experience of it may level out or even drop if you happen to have been unlucky. The annualised figures for a bad debt allowance are annual interest rate allowances needed to cover bad debt but the actual percentage of loans that go bad are higher.

    Chorlie, the rates available from P2P lending vary. Now just happens to be a relatively low interest rate period for some of them. Was better early 2012 and it'll be better some time in the future as well. Just keep an eye on things and consider using them when the rates make sense for you. But do use your full ISA allowance first.
    Last edited by jamesd; 29-11-2012 at 6:37 PM.
    • psychic teabag
    • By psychic teabag 28th Nov 12, 8:36 PM
    • 2,829 Posts
    • 1,678 Thanks
    psychic teabag
    8% First Direct, 6% Nationwide & 5% Cheshire / Derbyshire
    ...
    I can't workout the overall average rate over the year if I did the above (due to FD is 300, NW is 250 & Cheshire is 500 a month, so not a simple average of the rate) but I'd guess it would be around 6% some clever maths person will tell me the correct amount.
    Originally posted by Chorlie
    I'd guess a weighted average : 8 * (300 / 1050) + 6 * (250 / 1050) + 5 * (500 / 1050) = 6.1%
    • cepheus
    • By cepheus 29th Nov 12, 9:24 AM
    • 19,211 Posts
    • 20,338 Thanks
    cepheus
    Doesn't really address the unfavourable tax treatment of bad debt. Higher-rate taxpayers in particular really should not be lending on higher-risk markets. (Except perhaps on ratesetter if the provision fund works.)

    The table at http://www.p2pmoney.co.uk/compare/lend.htm is quite useful for illustrating how bad debt and tax rates interact.

    Also, rates quoted on zopa tend to be before fees, whereas ratesetter tends to quote rates after fees. So it's not fair to give typical rates of 6% on zopa for 3 years, but 5.8% on ratesetter for 5 years.
    Originally posted by psychic teabag

    What is the bad debt in that table entered as, a percentage?

    Why do you always need to add bad debt yourself as a variable even when you choose predicted or historic? It makes no sense.
    Last edited by cepheus; 29-11-2012 at 9:27 AM.
    • psychic teabag
    • By psychic teabag 29th Nov 12, 9:40 AM
    • 2,829 Posts
    • 1,678 Thanks
    psychic teabag
    What is the bad debt in that table entered as, a percentage?

    Why do you always need to add bad debt yourself as a variable even when you choose predicted or historic? It makes no sense.
    Originally posted by cepheus
    The bad debt in the table is a multiplier : leave it as x1 if you trust the provider's estimate, or reduce it if you feel optimistic, or increase it if you want to explore worse-case scenarios.
    • psychic teabag
    • By psychic teabag 29th Nov 12, 10:05 AM
    • 2,829 Posts
    • 1,678 Thanks
    psychic teabag
    zopa have their own forum at http://talk.zopa.com/ - potential lenders should probably have a read of the 'lending' forum there. In the 'chat' forum there are threads about other p2p providers.
    • Roge
    • By Roge 29th Nov 12, 10:41 AM
    • 15 Posts
    • 12 Thanks
    Roge
    I am interested in this. Is it possible to add a few concrete examples to the explanation precisely showing the fees involved from deposit to withdrawal with each company and what the actual net profit would be?
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